If insider selling is any indication, we appear to be nearing a top in equities.
Over the last six months, corporate insiders sold over 120 million shares, while they bought just 38,000 (per CNBC).
That's 3,177 times more sells than buys.
Insider sales hit a fresh high just last week, when 8,279x as much stock was sold as bought.
The chart below tells the story from a long-term perspective.
The top section shows the price of the S&P 500 index.
The middle graph shows a "score" representing the ratio of insiders buying to selling; a high score indicates insider buying, and a low score means insiders are selling.
The bottom graph shows net volume ($ value of transactions, buys minus sales)...
Data by InsiderScore.com, via SentimenTrader.
Insider selling is useful as a market indicator because it gives us a gauge on sentiment among top business execs.
When they're bullish on the economy and their company's prospects, they buy. And vice versa.
With that in mind, a few things stand out here:
- Note how strong selling volume was from late 2005 to late 2007, as insiders sold at the top.
- And see how the buy ratio spiked from late 2008 to early 2009? Insiders nailed it again, buying near the market bottom.
The highlighted section of the last graph is especially noteworthy. Insiders selling at record levels may be a sign: WARNING! Correction Ahead.
Then again, the Fed is goosing U.S. markets full force. Timidness will not be tolerated, as pitifully low bond and CD yields chase investors into riskier investments, retirees be damned.
So while insider sales do look bad, there are other factors to consider. The liquidity being pumped into the banks should help prop up stock prices, at least temporarily.
But the macro concerns continue keep mounting, chief among them the EU debt disaster.
European debt hits home
After months of pressure, Ireland has been talked into accepting an aid package. Although, calling it an aid or "rescue" package is a bit of a stretch...
The Irish people are not the real "rescuees" in this operation; banks are the ones being rescued, as they refuse to take losses on their Irish debt.
Ireland cannot pay its debts, just as Greece cannot, short an economic miracle.
They should default on their bonds and force the ones who lent the money to take losses.
Instead, the debt risk will be shuffled around, and generally transferred from banks to Irish citizens. They'll be paying for it for decades.
As we know, modern economic theory dictates that bond investors should not be held liable for bad investments. The fact that this violates every principle that makes capitalism work is a moot point, seemingly.
Unfortunately, there are other (significant) clouds looming over markets...
Insider trading scandal, bank balance sheets
Back in the States, that hedge fund insider trading scandal just keeps getting bigger.
Just today, a number of prominent hedge funds and investment firms announced they are being investigated by Federal authorities. If investors start to pull cash from hedge funds, a snowball of redemptions could start a cascade of selling in all sorts of (mostly high-beta) securities.
Bank stocks also have been wavering, and for good reason, frankly.
There's foreclosuregate, the bank problem that just won't go away.
Mortgage bond putbacks also threaten bankers' well-being. A "putback" refers to the option given to mortgage bond buyers in the event that loans go bad.
So far, investors including Freddie Mac and Pimco have demanded banks buy back faulty mortgage securities, essentially putting them back onto the bank's balance sheet.
These are some of the more severe factors that could adversely affect markets over the near-mid term. We'll keep you updated as we learn more. If you haven't signed up for our free daily newsletter yet, you can do so here.
Good investing,
Adam Sharp
Analyst, Wealth Daily
